First ever peer-to-peer Isa offers up to 6pc returns

Investors will be able to earn peer-to-peer levels of interest tax-free from
April 6

Investors will be able to earn returns approaching 6pc interest on up to £15,240 from April, as the first “peer-to-peer” Isa sets out its terms.

RateSetter, one of the more established “P2P” platforms, will launch its Isa on April 6 and has shared the details with Telegraph Money. Peer-to-peer has grown dramatically in recent years and involves websites, such as RateSetter, linking borrowers with investors. The principle is that both “sides” enjoy better rates.

To support the growing sector, the Government says P2P investments will qualify for Isa inclusion from April, making returns tax-free.

RateSetter’s Isa users will have access to the same interest rates as others who lend on the platform outside of an Isa “wrapper”.

Rhydian Lewis, chief executive, said: "We already have a product, we're just putting it within an Isa wrapper. I think banks sometimes think people will tolerate lower interest rates because it's an Isa. We don't want to do that," he said.

Investors will be able to invest at the platform's market rate, or choose their own rate. This means that an investor can choose a level of interest for their money to earn, and it stays on the market earning no interest until a borrower selects it.

Savers might consider the IF Isa as an alternative to a cash Isa

Four timeframes will be available – a monthly, annual, three year and five year investment. If investors pull their money out early, they will get the interest they would have done had they bought the product for that timeframe. If capital is invested in a five-year Isa and removed after one year, it will only earn the lower interest level for the shorter Isa period.

If rates have gone up, investors also have to pay the difference in interest between the initial rate and the new one if the investment is removed early.

The investor will earn the initial rate of interest for the entire term of the Isa, and these change every day depending on the supply of investors and the demand from borrowers.

At the moment rates vary from 3.5pc, for the shortest term, to 5.9pc, for the longest term. Investors choose the market in which to invest, but can’t choose the individual borrowers.

If savers already have a cash or stocks and shares ISA, they will be able to transfer that to the new Isa on top of the £15,240 annual allowance after April - so it would be possible to invest more than £30,000 immediately.

Investors will not have protection from the Financial Services Compensation Scheme, but are protected by RateSetter’s provision fund. Peer-to-peer platforms have interim permission to operate from the Financial Conduct Authority, but are waiting for the full authorisation, which will allow them to launch their Isas. Mr Lewis said he "fully expects" all peer-to-peer lenders to be fully regulated by the FCA in time to launch the Isa in April.

Mr Lewis said: "We expect this to compete as much with the cash Isa as with the stocks and shares Isa. It sits neatly in the middle. If you want absolute certainty, go for a cash Isa. But if you are prepared to take on a little more risk for better returns, we think this is a good option."

The platform's rates for lenders could go down if there is a rush to invest, but Mr Lewis said they expect this to be balanced by an increase in demand from borrowers as loans get cheaper.

Critics have said that the respectability of the Isa brand might give savers the wrong impression about the safety of their investment, amid concerns about how the peer-to-peer platforms would perform in an economic downturn.

Most peer-to-peer companies are untested in this environment, as only one - Zopa - existed during the 2008 market crisis.

Last year October Swedish platform TrustBuddy filed for bankruptcy, and lenders are still trying to get their money back. Around £23m had been lent through the platform.